Saudi Arabia's New Private Sector
Changes, Privatization Challenges
This article examines recent institutional and
project development trends in Saudi Arabia’s new push to have greater role for the private
sector in the future economic development of the Kingdom.
As discussed below, recent developments at the new cities of Jubail and Yanbu are an
important part of these new initiatives.
A brief overview of the Saudi economy is
presented followed by a review of recent institutional
and investment policy changes, Kingdom investment plans,
project development trends
and our observations on the great investment opportunities within the Kingdom.
Saudi Arabia: 2012
& 2011 Year End Review
Business Group's Publication
2012 gets underway, Saudi Arabia can look back on 2011 as a year
of solid growth, as well as anticipate a further 12 months of
expansion and development, building on an already impressive
economic platform as the state seeks to guarantee future growth
through investments in infrastructure and human resources….
During 2011 the government unveiled a series of new investment
programmes valued at more than $110bn, of which some $31bn was
to be spent during the year with the remainder to be expended
subsequently. The majority of this funding – coming on top of
the $155bn planned for the 2011 budget – is being channelled
into a wide range of infrastructure projects, particularly those
aimed at boosting transport and logistics. Further funds are
being directed towards schemes to provide low-cost housing,
improve health and education services, expand the industrial
base and strengthen the Kingdom’s utilities backbone.
About the Author:
Dr. J. Michael Cobb, worked extensively in Saudi Arabia in the early 1980's and later in the
mid 1990's. His major work involved on the planning, development finance and implementation of
Industrial City, while serving as a senior manager and later consultant with the Saudi Arabian
Bechtel Company and the Royal Commission for Jubail and Yanbu. His other
work in the Kingdom involved the planning and development implementation
of the country's two major new international airports and other private
real estate projects. While with Bechtel and the Royal Commission, he
also served on a national committee advising SABIC's industrial
investment program for the Kindom.
The Saudi economy is currently dominated by massive state corporations which
account for about two thirds of the Kingdom’s GDP. These
include firms such as Saudi ARAMCO, the Saudi Basic
Industries Corporation (SABIC), the Saudi Electricity
Company (SEC), the Saudi Telephone Company (STC) and the Saline Water Conversion Corporation
(SWCC). One should remember, however, that
prior to the Kingdom’s great oil boom in the 1970s, most of these companies, including
ARAMCO, were privately owned.
Due to the increasing levels of public debt in the Kingdom, combined
with declining public capital expenditures and generally lower levels of real growth in the
economy, the government is refocusing its policies toward increasing the private sector role
in country’s economic development. Key
leaders such as HH Prince Abdulla bin Faisal bin Turki Al-Saud, Governor of the Saudi
Arabian General Investment Authority, have recently stressed the important role that privatization
could assume in spurring local private investment as well as greater foreign direct
Other advantages of increased privatization include retirement of
major portions of current public debt, reductions in future public debt and state subsidies,
innovations in new management and marketing techniques and the potential repatriation of
significant levels of Saudi private capital currently invested abroad.
Until recent policy changes, which are
discussed below, the Saudi government’s efforts in privatization were mainly involved in
permitting private management of port and airport operations and the provision of education,
health and some postal services is support of the primary government entities. However,
outright sale of existing state assets has not yet occurred.
There is movement toward greater
privatization, however, in the electric power sector, as is discussed below.
Actions toward state asset privatization for other sectors is much slower. SABIC has been 30 percent private for many years, and was constituted to be
eventually completely private although most observers say this unlikely anytime soon.
As for Saudi ARAMCO, the Kingdom’s primary asset, there has been no public mention
of even partial privatization of any of its horizontal or vertical entities.
Other areas often cited as privatization
candidates include various municipal services (as discussed below for Jubail and Yanbu), the
national airline, hotels, various distribution facilities and more private shareholders in
state banks. For substantial private sector
involvement to occur, however, fundamental changes in the Kingdom’s institutional
structures were required. The following section
outlines these significant recent changes.
Recent Key Institutional Changes
Saudi Arabia announced a significant new Kingdom-wide investment promotion
and development system in April 2000. Culminating several years of work by the
government and the private sector, the new system seeks to transform and improve the Kingdom’s
development strategies and priorities, especially focusing on initiatives for accelerating
private sector investment and development in the country. This new private sector focus is a
key investment component of the official 2000-2005 Kingdom development plan and is also a
key component of the country’s WTO membership strategy of attracting up to $200 billion in
foreign investment during the next 20 years. Below is a brief overview of these new private
sector focused Institutional changes
Supreme Economic Council
In August 1999 King Fahd established the new Supreme Economic Council headed by Crown Prince
Abdullah. This new body, which includes representatives from the private sector as
well as government, , is charged with developing the new economic strategies for the Kingdom
as well as will insuring the legislative
changes needed for their implementation.
Supreme Petroleum Council
Recognizing the importance of energy to the Saudi Economy, in January 2000 King Fahd then
established the Supreme Petroleum Council. Their
mandate is to oversee the development of new strategies regarding the Kingdom’s role in
world oil markets and OPEC as well as developing new strategies for opening-up of private
sector investment opportunities in the energy sector, particularly for natural gas which is
not only a fuel source but also the key feed stock for the Kingdom’s petrochemical
Foreign Investment Law
The Kingdom’s new Foreign Investment Law is one of the key initiatives taken by the new
Supreme Economic Council. Adopted by the
Council of Ministers in April 2000, the new Foreign Investment Law
now permits 100 percent foreign-owned ventures having
the same privileges, incentives, and guarantees as Saudi-owned ventures.
Business applications and permitting are also being streamlined in that the basic government
assumption is they will be promptly approved. The Law requires all new investment
applications be handled within 30 days from the time required documents are submitted.
If there is no action to disapprove during this period, the investment initiative will be
registered as approved.
Investment & Property Ownership
The by-laws approved
and released in late 2002 by the Saudi Arabian General Investment
Authority (SAGIA) offered new incentives for foreign investment. Foreign
investors can now own property in the Kingdom. This includes
sponsoring their own employees and having 100 per cent ownership of
projects established in Saudi Arabia.
to Arab News reports, foreign investors now will not need
Saudi sponsors, can repatriate all profits and will generally have
access to all facilities available to Saudi businesses. Among other key
new incentives, the corporate tax rate
has been reduced from 45 to 30 per cent, including tax holidays.
announced SAGIA executive by-laws, there are 23 articles addressing
investment, licensing, legal regulations and other factors important in
attracting foreign investment in the Kingdom.
here to see our further review of the recetly revised Executive
Rules government foreign investment in the Kingdom).
Opening of the Saudi Stock Market
A related major change
by the Supreme Economic Council in late 1999 was the opening up of the Saudi stock market
foreign investors. Previously, only Saudi
citizens were allowed to own individual securities, and Saudi mutual funds allowed only
foreign investment from neighboring Gulf Cooperation Council (GCC) states. However, the new
regulations allow international investors share access to twelve (12) mutual funds operated
by various Saudi banks, with many thinking that the individual
stocks ownership by soon follow.
Arabian General Investment Authority
In a related separate April 2000 decree, the new Saudi
Arabian General Investment Authority (SAGIA) was established. Under the direction
of Governor HH Prince Abdulla bin Faisal bin Turki Al-Saud, SAGIA
forms a one-stop investor support agency, specifically the Comprehensive
Service Center (CSC), charged with insuring an efficient approvals process while also
promoting new investments.
The previous investment promotion agency, Saudi Consulting House, was
dissolved with its functions restructured into the CSC.
SAGIA incorporates and coordinates all of the various investment focused branches of
the government and also includes representatives from the private sector sitting as full
members on the Board.
Saudi Electric Company
In February 2000 a merger
agreement was signed among Saudi Arabia's 10 existing power companies. This included the
four critical "SCECO"'s (West, East, South and Central) which together controlled
about 85% of the Kingdom’s power supplies. Later in April 2000 this merger resulted in the
much anticipated Saudi Electric Company (SEC), a joint-stock
company 50% owned by the Saudi government.
The establishment of SEC
appears to offer the potential for eventually splitting off separate companies for power
generation, transmission and distribution and for private sector construction of plants
under various BOT models. However, no one minimizes the challenges remaining to be resolved
over issues of taxation, the underlying legal and regulatory frameworks, fuel supply and
power purchase agreements and other operating concerns.
For many years the four
SCECO companies operated at a loss due to inefficiencies, non- payments by customers and
requirements to sell power at below cost to Saudi consumers. The new SEC was to correct
these difficulties. With a promising beginning, in April 2000 the new company increased
power tariffs to major power customers. However,
this was short lived. Due to the resulting
widespread criticism, by early October 2000 these rate increases were rescinded, an action
viewed by many as a move away from reform of the power sector and possibly a move away from
privatization in the Kingdom generally.
Arabia recently announced plans for infrastructure investments of $700
billion over the next twenty years, with substantial opportunities
to be provided for foreign involvement.
at the Middle
East Infrastructure Development Congress in Dubai in late Septermber
2003, Prince Abdullah bin Faisal bin Turki Al Saud, Chairman and CEO of
the Saudi Arabian General Investment Authority (Sagia) indicated the
major sector investment would include: the electricity sector at
SR435 billion; the water resources sector at SR330 billion;
telecommunications at SR225 billion; petrochemicals investments at
SR345 billion; a various other basic infrastructure projects totaling
the Kingdom's recent April 2000 Saudi Investment Act, discussed above,
Prince Abdullah stressed that the investment environment for foreign
investors had been substantially bolstered, privatization is well
underway and that twenty 20 economic areas currently under state control
have been slated for further privatization. The Prince emphasized that economic
and legislative reforms are an on-going process but that privatisation
is a corner stone of the Kingdom's economic reforms. (See the TradeArabia
News service for the latest on Saudi Arabia's investment and
- An Important Shift In
We consider such an
assessment from the SEC actions, however, premature, especially in light of more recent
developments employing new financing mechanisms and public-private initiatives in the
Kingdom. For example, Ghazlan II is a $1.7
billion Eastern Province power project being financed with a $500 million commercial
syndicated loan, a first in Saudi Arabia. Also, in October 2000 plans were approved for a SF
2.5 billion Saudi Joint Stock company, the Power and Water Utility Company for Jubail
& Yanbu, or MARAFIQ.
Shareholders include the
Royal Commission, Saudi Aramco, the Public
Investment Fund, SABIC and local private investors. MARAFIZQ
will take over management, operations, maintenance, and expansion of power, water,
wastewater, seawater cooling and related utility infrastructure needs for current and future
growth of the two industrial cities. The new
utility also will take over leases on the existing facilities and will own them outright at
9-11: A Personal Perspective
Over the last thirty years, most of the opportunities
that Saudi Arabia had to offer the business world involved government contracts.
Although these will continue, the government indicates that most of the newer opportunities
will involve private sector investment and new private business ventures.
The great state funded mega projects and investments of the past 30 years were
essential in providing the underlying infrastructure base for the Kingdom.
These national investments were successfully
accomplished and the platform is now there for supporting the further development of a
modern economy where the private sector takes a major role. With globalization of the world’s economy and great technological and
communication capabilities becoming increasing available to people everywhere, however,
Saudi Arabia continues to face great external as well as internal challenges.
impacts of the World Trade Center 9-11 tragedy of 2001, followed the
global War on Terror and the its direct impacts playing our in
Afghanistan and Iraq, are still reverberating not only in the
Middle East but throughout the world. And most certainly these impacts
are being felt not only within the government but with the business
community and with ordinary Saudis throughout the Kingdom.
Arabia is also now are confronting terrorism directly within its own
borders. In addition to the pressures of the the Post 9-11
aftermaths, the people of Saudi Arabia must also continue addressing the
impacts of globalization on - and within - their country. Ways must be
found for appropriately integrating
the great global economic, technological and communication forces into their country
for the good of their people. This appropriate integration of globalism
most certainly must involve upholding and strengthening the critical social, cultural,
religious and institutions values forming
the foundations of the Saudi Arabian society.
their neighbors in the Middle East as well as the rest of the world, the
Saudis also appear to have a continuing critical role to play on the
world stage. That is, once again serving a major stabilizing force in the
volatile political area of the larger Middle East region. Our view is that the Saudi people
can and will
continue to successfully meet these great challenges, not only for
their own people but for all of us.
Middle East Finance
& Economy. Mar. 2003
Dept. of Commerce, National Trade Data Bank
Other Background Reports &
Arab News, March 23, 1993; Saudi Arabia Survey:
Oil Policy and the Private Sector. Financial Times, Jan. 30, 1992; 15 Years of
Development, Jubail Development Review, Vol. 7, No.2, Dec. 1992, Investment
Promotion Department, Jubail Directorate, Royal Commission for Jubail and Yanbu;
Information on Jubail Industrial City: A Place for Industry, Economic Development
Department Brochure, Jubail Directorate, Royal Commission for Jubail and Yanbu,
1990; Saudis Turn Desert Into City, New York Times, Feb. 17, 1987; Bechtel's
Master Builders, Time, July 12, 1982; Vast Saudi Gas-Gathering System Moves Into
Final Phase, Oil & Gas Journal, Apr. 12, 1982.
IDC Int'l Development
All rights reserved.